Arthur Ciampi
Arthur Ciampi ()

Retirement from the practice of law is both an achievement and, understandably, a cause for stress for most lawyers. For many partners at large law firms, the transition process to retirement is somewhat easier as clients can be introduced gradually to other partners and client relationships can be “institutionalized” over time. In addition, many larger law firms offer the ability for partners to remain as “of counsel,” and some firms still pay retired partners a pension.

Partners in smaller law firms or solo practitioners contemplating retirement from the practice of law do not typically have an established mechanism for the transition of their practice upon retirement. As a result, many lawyers in small firms or solo practices are simply left to close up shop when they retire, often leaving their career’s work behind with no future income to show for their professional life’s efforts.

Last month, the Appellate Division, Fourth Department, issued a memorandum decision which highlighted some of the legal tensions inherent in the sale of a law firm practice. The decision also echoed some of the concerns the New York State Bar Association Committee on Professional Ethics addressed last year in New York Ethics Opinion 961 titled, Can a Retiring Attorney Sell a Law Practice and Retain the Right to Receive a Portion of Fees for Legal Services That Will Be Provided After the Sale Date?

In this month’s column, we address the recent Fourth Department decision, the general parameters concerning the sale of a law firm, and Opinion 961, and then offer some suggestions on how, with these guidelines in mind, a sale of law firm can be accomplished.

Keinz v. Peter M. Hobaica, LLC

In Keinz v. Peter M. Hobaica, LLC,1 the Fourth Department affirmed a judgment of the trial court which held that the purchaser of a law firm practice was no longer obligated to pay the seller any portion of fees earned as set forth in their agreement following the lawyer’s resignation. In Keinz, Peter M. Hobaica, LLC purchased the Keinz law practice pursuant to an agreement dated Nov. 2, 2006. On June 22, 2010, Keinz resigned from the practice of law. Thereafter, Hobaica ceased making certain payments under the agreement.

Keinz sued for a declaratory judgment that Hobaica was obligated to pay Keinz, pursuant to the agreement, 50 percent of the net income derived by Hobaica from clients of Keinz’s former firm. Keinz also sought reformation of the agreement to reflect that the payments were part of a purchase price of his law practice and not an agreement to share fees.

In pertinent part, the Fourth Department affirmed and held that the trial court’s findings that the payments at issue were part of a fee sharing arrangement, rather than a portion of the purchase price of Keinz’s former firm, was consistent with the fair interpretation of the evidence. The Appellate Division found that Keinz resigned from the practice of law and was no longer entitled to “share in any fee for legal services rendered by another attorney during the period of…removal form the roll of attorneys.”2 The court concluded, therefore, that the provision of the agreement providing for the payments to Keinz of legal fees was not legally binding.

Accordingly, the Fourth Department found the agreement to be a fee sharing agreement, as opposed to the sale of a law firm agreement, and found that the division of fees with a resigned lawyer to be no longer enforceable. In reaching its decision, the court, without explicitly stating such, highlighted the tension between two New York Rules of Professional Conduct Rule 1.17, concerning the sale of a law practice upon retirement, and Rule 1.15, concerning the sharing of legal fees.

Rules Seemingly at Odds

New York Rule of Professional Conduct 1.17 Sale of a Law Practice. Simply stated, New York Rule of Professional Conduct 1.17 permits attorneys who are retiring from the practice of law to sell all of their law practice including its goodwill. The rule states, in pertinent part:

A lawyer retiring from a private practice of law; a law firm, one or more members of which are retiring from the private practice of law with the firm; or the personal representative of a deceased, disabled or missing lawyer, may sell a law practice, including goodwill, to one or more lawyers or law firms, who may purchase the practice.3

There is no restriction under Rule 1.17 concerning the timing of payments to a retired attorney, and, accordingly, an attorney who is retired from private practice may be paid from future fees earned by the lawyer, lawyers or law firm to which the practice was sold.4

New York Rule of Professional Conduct 1.5(g) Fees and Divisions of Fees. Seemingly at odds with Rule 1.17 is Rule 1.5(g) which limits the ability of lawyers to share fees with another lawyer to whom they are not associated in the same firm. In particular, Rule 1.5(g) provides:

(g) A lawyer shall not divide a fee for legal services with another lawyer who is not associated in the same law firm unless:

(1) the division is in proportion to the services performed by each lawyer or, by a writing given to the client, each lawyer assumes joint responsibility for the representation;

(2) the client agrees to employment of the other lawyer after a full disclosure that a division of fees will be made, including the share each lawyer will receive, and the client’s agreement is confirmed in writing; and

(3) the total fee is not excessive.5

Accordingly, if the criteria of Rule 1.5(g) are not met, there should not be a sharing of legal fees. In the context of a retirement, however, the Rule 1.5(g) criteria cannot typically be met because the retiring lawyer is ceasing to work as an attorney and cannot divide services or assume joint responsibility for the matter.

State Bar Ethics Opinion

In March 2013, the New York State Bar Association Committee on Professional Ethics expressly addressed the tensions between Rule 1.17 and Rule 1.5(g) and concluded that a retiring lawyer selling a law practice may, in certain situations, collect future fees in the sale of his law practice if those fees fairly reflect the value of the selling lawyer’s “goodwill” in the sold firm. Opinion 961 also provided limits for such payments and concluded that the retiring lawyer may not condition future referrals on payment of a portion of the fees earned from the referred matters.

Opinion 961 identified the source of the tension between Rule 1.5(g) and Rule 1.17 in the inclusion, in Rule 1.17, of the sale of a law firm’s “goodwill.” As Opinion 961 explains: “By its nature, the inclusion of “goodwill” in a sale of a law practice entails a payment on account of legal fees that the buyer is expected to receive in the future.”6 This is the case because, as defined by the Court of Appeals in Dawson v. White & Case in the law firm context: “When applied to law firms, the term “goodwill” refers to the “ability to attract clients as [a] result of [the] firm’s name, location, or the reputation of [its] lawyers.”7

Thus, Opinion 961 concludes that Rule 1.17 should be viewed as an exception to Rule 1.5(g): “that is, that the payment for “goodwill” that is explicitly permitted by Rule 1.17 permits a payment that is made in the future after the fees that reflect “goodwill” are earned.”8

Some practical guidelines are then offered by Opinion 961 concerning what would comprise acceptable fee sharing provisions in a sale agreement. First, the opinion advises: “The extent of fee sharing must bear a reasonable and bona fide relationship to the value of ‘goodwill’ involved.” It then suggests that, because even the most well-known lawyer’s reputation fades over time, any such provision must be limited “in amount and in time.”9 In addition, the opinion approved provisions in a sale agreement which provided for payment to a selling attorney concerning payments from:

• existing clients with pending actions and a retainer agreement that provides for a contingent fee upon amounts collected;

• existing clients with claims contemplated in future years after the date of sale of the law practice and a retainer agreement that provides for a contingent fee upon amounts collected; and

• new clients who retain the purchasing attorney after the date of the sale, where the new client is a separate entity but has common principals with existing clients of the selling attorney as of the date of sale and a retainer agreement that provides for a contingent fee upon amounts collected.10

Practical Suggestions

In sum, and by combining the guidance of the Fourth Department in Keinz with that in Opinion 961, we conclude that the following minimum criteria must be met to have an enforceable agreement for the sale of a law practice: (1) the agreement must be as a result of the bona fide retirement from the practice of law and not a fee sharing agreement; (2) the payments must be limited in “amount and in time”; (3) the source of the payments must be limited to (a) existing clients with pending actions and a retainer agreement that provides for a contingent fee upon amounts collected; (b) existing clients with claims contemplated in future years after the date of sale of the law practice and a retainer agreement that provides for a contingent fee upon amounts collected; or (c) new clients who retain the purchasing attorney after the date of the sale, where the new client is a separate entity but has common principals with existing clients of the selling attorney as of the date of sale and a retainer agreement that provides for a contingent fee upon amounts collected.

Arthur J. Ciampi is the coauthor of the treatise ‘Law Firm Partnership Agreements’ and is the managing member of Ciampi LLC. Maria Ciampi, of counsel to Ciampi LLC, assisted in the preparation of this article.

Endnotes:

1. Slip Op. CA 13-01158 (Feb. 14, 2014).

2. Id.

3. New York Rules of Professional Conduct Rule 1.17(a).

4. It is important to take note of the other requirements of Rule 1.17 which are not discussed in this column concerning, inter alia, preserving client confidences, obtaining client consents, and providing notice to clients.

5. New York Rules of Professional Conduct Rule 1.5(g).

6. NY Eth. Op. 961 (N.Y. St. Bar. Assn. Comm. Prof. Eth.), 2013 WL 1281262 (March 13, 2013).

7. Dawson v. White & Case, 88 N.Y.2d 666 (1996). The author represented the plaintiff in this case.

8. NY Eth. Op. 961.

9. Id.

10. Id.